The bill for the big banks in recompensing clients over financial scandals is continuing to rise, with the ANZ last week ordered by regulator ASIC to boost by $6 million to $10.5 million its compensation to mistreated OnePath superannuation customers.
That news “is a shock but not a surprise” said Erin Turner, campaigns director with consumer group Choice, although “it shows another disappointing outcome”.
While the extra cash will be welcomed by wronged ANZ customers, it’s small beer compared to what the banks have had to pay all up. In recent years a series of scandals have seen the big banks hit with compensation bills of at least $355.4 million.
Most of that money came as a result of mistreatment by bank financial advisory arms which, among other things, involved forging client signatures to switch investment choices without permission. Banks also charged clients advisory fees without giving any financial advice.
The figures are staggering with ASIC demanding the banks pay back a total of $204.9 million and of that only $60.4 million has been paid to date. The banks still owe $144.2 million, plus an interest component which has not been detailed.
A spokesman for ASIC said the shortfall in payments is not the result of a time payment regime drawn up by the regulator.
It is the result of the fact that the banks are having to trawl through their records to find details of the customers concerned and how much money they are owed, which apparently takes time. Just how much time presumably depends on the banks.
The list provided does not include all the high-profile scandals of recent years. The cost to the CBA of the money laundering scandal involving 53,700 transactions breaching reporting laws is yet to be determined and there are other issues under investigation or legal challenge.
There are also bank-related issues like the $500 million collapse of Timbercorp and the $3 billion Storm Financial collapse where incentives and lax lending saw the life savings of thousands go up in smoke, often at the latter stages of life when recovery was impossible.
Where recompense is made it doesn’t necessarily fully compensate for losses. For example the CBA repaid Storm Financial investors around $140 million when estimates of losses by those who borrowed through CBA were far higher than that.
Naomi Halpern, an activist who suffered personal losses in the Timbercorp collapse, says often compensation arrangements are inadequate. ANZ was a significant lender to Timbercorp investors.
“They’re not even giving back all of what has been lost. There is no recompense for the trauma and suffering people go through, you only get a percentage of the loss,” she said.
Ms Halpern is working with the review of banking dispute resolution led by Professor Ian Ramsay. She said while the committee is consulting widely the banks to date have only agreed to a prospective scheme that will compensate for future wrongs.
“They’re not interested in a retrospective scheme,” she said.
To date CBA has been hit with the biggest bills for compensation following the banking scandals. Payments will total $245.8 million when its compensation over financial planning misbehaviour are completed.
The bank reported a record profit of $9.88 billion last week and its theoretical liability over the money laundering issue totals almost $1 trillion.
Any settlement is likely to be far lower than that but with ASIC now pledging to look at the actions of CBA directors over the issue, there looks like being considerable personal and financial angst experienced at the bank before the issue is laid to rest.
Australian banks are borrowing money at record-low rates from their term-deposit customers, despite needing their cash more than ever.
Dozens of institutions have cut the interest rates they pay on locked-away savings, even though the Reserve Bank hasn’t touched the official cash rate since August last year.
The RBA reported in recent days that rates on three-month and six-month term deposits have fallen to record lows.
Martin North, finance expert at Digital Finance Analytics, said savers are “trapped” and “copping it”.
“The banks have quietly been eroding the returns on deposits at the same time as they’ve been lifting the interest rates on their mortgages,” he told The New Daily.
“It frustrates me that everybody is fixated on mortgage rates, but we’ve got this other segment of the population that is intrinsically trapped by these lower interest rates.”
Average rates on three-month term deposits peaked at 6.55 per cent in 2008, just after the global financial crisis, and have plunged ever since. In July, the latest figures available, the average rate fell below 2 per cent for the first time since records began in 1982.
Back in 2008, a saver with $10,000 could have earned $163 for locking away their cash for three months. Now, with the average rate at just 1.95 per cent, they’d be lucky to get $48 for their trouble.
Since the RBA cut rates last year, 59 institutions have slashed their three-month term rates (compared to four increases); 47 have cut one-year rates (with only 17 increases); and 24 have cut five-year rates (compared to just six increases), according to comparison website Canstar.
“My suspicion is we’re not going to see term deposit rates go up until we see the Reserve Bank go up,” said Steve Mickenbecker, chief financial spokesperson at Canstar.
“The banks have not felt any need to compete harder.”
More galling for borrowers is the fact, revealed by the RBA, that banks need term depositors more than ever.
RBA assistant governor Christopher Kent told an event in Sydney on Wednesday that banks are increasingly borrowing from everyday Australians the money they use to fuel their profits, rather than from expensive overseas bond markets like New York.
Deposits now account for 60 per cent of bank funding, Mr Kent said, up from lows of 35 per cent before the financial crisis – a shift he described as “quite stark”.
This is because the market and regulators have pressured the banks to rely more on term deposits, as this source of funding is considered more resilient to economic shocks.
Here’s how to make the banks pay more for the money they need.
Term is better than nothing
Finance analyst Martin North said many Australians have their money in online savings accounts, without realising they could be getting a better deal from a term deposit.
“There are many people holding their money at call, rather than in term. They will probably not be aware how much their interest rates have dropped in recent times because a lot of people set and forget,” he said.
In July, online savings accounts were paying a miserable 1.65 per cent on average – compared to 1.95 per cent for three and six-month terms, 2.25pc for a year, and 2.5pc for three years.
“If you can afford to tie your money up for a bit longer, it’s probably worth it because you’ll get better rates.”
Never break a contract
Mr North said it is “almost always” a bad idea to pull money out of a term deposit before it reaches maturity in order to take up a better offer elsewhere, as you will often be charged a hefty penalty.
“If you’ve got money in a term deposit, you’ll be locked into a specific term. It’ll be a contract,” he said.
“So be very careful about breaking contract to chase higher rates, as you’ll be charged an arm and a leg to do that.”
Look beyond the big banks
Term deposits are not just offered by the big four banks. They are available at smaller banks, community banks, credit unions and building societies across Australia, so it could be a good idea to compare widely before choosing an account.
“Don’t just automatically assume that the bank you’re with gives you the best rate, because they may not. There’s no guarantee they are,” Mr North said.
“So shop around.”
Steve Mickenbecker at Canstar said one of the biggest mistakes made by term depositors was rolling over at the same institution, without comparison shopping.
“If you go into term deposits, be prepared to be a little bit active. Maybe that means going for your six or 12-month term, but be prepared to shift when you get to the end of that term,” he said.
“Never do an auto renew. Look at the rates on offer every time you approach maturity.”
Be wary of super-long terms
Banks may be keen for long-term customers, but the market expects the RBA to lift rates relatively soon.
Mr North said locking away your money for too long could mean you miss out when rates eventually rise.
“Bear in mind that the likelihood in the medium term is that rates will go higher still, so you probably don’t want to go out too far because effectively you might be sitting on a rate that in two years time looks rather cheap.”
Consider an annuity
An alternative to the term deposits sold by banks are short-term annuities offered by life insurance companies, with terms of one year or more.
Justin McMillan, financial planner at Perth-based Smart Wealth, said annuities have better rates because providers are “aggressively” chasing new customers.
“Annuities are basically like extended term deposits, but the rate, because it’s from a life insurance company rather than from a bank, is normally better,” Mr McMillan said.
“They are a growing product, so it’s really a market share play.”
Anyone is eligible, and two of the biggest providers are Challenger and CommInsure. But remember: unlike term deposits, they are not guaranteed by the government.
Editors note. DFA changed the wording in the fourth paragraph as the original article as written confused borrowers with savers!
The Turnbull government’s plan to allow first home buyers to direct up to $30,000 of superannuation savings into a housing deposit could end up draining super accounts and costing savers more than using a traditional bank account.
Stephen Anthony, chief economist with Industry Super Australia, said the First Home Super Saver Scheme, sold by the government as a housing affordability measure, would offer limited benefits to first home savers and threaten retirement savings.
The plan, introduced in the May budget, allows first home buyers to salary sacrifice up to $30,000 into their super account at a maximum rate of $15,000 a year.
The savings are taxed at the super rate of 15 per cent on the way in, which is lower than the 19c bottom tax rate and so gives you a benefit. When funds are withdrawn they are taxed at the marginal rate of the saver less 30 per cent.
This is where the plan strikes trouble. The ATO doesn’t simply tax the money you take out when you buy a home, it will assume you made a return on it that is equivalent to the bank bill rate (what banks pay professional investors) plus three per cent.
That guaranteed return is added to the amount you withdraw, which is fine if your super fund is earning that amount or more. But in years when your super fund makes less than that benchmark, money is effectively being taken out of the rest of your super to make up the figure the taxman wants you to have.
“Super funds will be forced to dip into compulsory savings to cover shortfalls in ‘guaranteed’ returns, leaving people with much less at retirement,” Dr Anthony told The New Daily.
Those transfers from your super to fund your home deposit can be significant. For the year to June 2016, for example, using the ATO’s formula would have seen you transfer an average of 2.3 percentage points of your general super returns into your deposit savings account, ISA research says.
There are other problems with the proposal, due to go before Parliament in the second half of the year, as well. While it might look attractive at first blush, the savings you think you’re making are less than they appear.
The super contributions tax will take a significant bite from your fund.
“People must also understand that after paying super contributions and earnings tax, the $30,000 put into the scheme could be worth as little as $25,000 on withdrawal,” Dr Anthony said.
People are likely to forget that if they had saved the money into a high interest savings account they would have avoided to the contributions and earnings tax as well as getting interest on their deposit.
For people carrying HECS/HELP debt from their tertiary education days, the benefits are even less. That’s because they have to pay back their debt once they hit relevant income targets.
Add all that together and the overall benefits from the scheme shrink significantly, as the chart above demonstrates.
Eva Scheerlinck, CEO of Australian Institute of Superannuation Trustees, said the plan is in conflict with the aim of super because it diverts benefits to current housing needs.
“The use of a super fund for a deposit on a first home is inconsistent with the sole purpose test which requires that super funds maintain benefits for members’ retirement or for insurance-related purposes,” she said.
“It is also inconsistent with the government’s own stated objective of superannuation to provide income in retirement.”
New data suggests rising property prices are a threat to the retirement system, as many Australians use their superannuation balances to pay off their mortgages before they retire.The latest investment update from NAB highlights that many Australians are concerned about ending their working lives in debt. It reported an increase in the number of respondents who feared a lack of retirement savings. It also found that paying down debt was the highest priority for the next 12 months.
Likewise, the 2017 Household, Income and Labour Dynamics in Australia (HILDA) report – widely reported in recent days for its concerning home ownership numbers – also showed that both men and women were spending considerable chunks of their super to pay debts.
It found that men paying down debts spent on average $240,000 to do so in 2015, or 58 per cent of their super, while men helping family members spent $108,500, around 84 per cent of super. Women paying down debt spent $120,500, or 70 per cent of super and those helping family spent $67,000, or 48 per cent of super.
Some men and women also spent up big on things for themselves, as the following table shows. However, men spent far more than women here, indicating the gender imbalance in superannuation accounts.
Ian Yates, chief executive of the Council on the Ageing (COTA), said rising property prices could force more people to pay down more mortgage debt on retirement in the future.
“People are paying off debts of not inconsequential amounts on retirement. The numbers doing it and the amounts used surprised me,” he told The New Daily.
“It’s a concerning trend and if people plan to use their super to pay off a mortgage then they are not using it to provide retirement income.”
He said this could result in the government being faced with a dilemma.
“Given the family home is untaxed, the increased use of concessionally-taxed superannuation to pay off homes in retirement would not be what the government intended,” he said.
That could mean governments would be forced to review both superannuation and housing policy as “both superannuation and the age pension are predicated on high levels of home ownership”.
The HILDA report also showed that both men and women are retiring later with the average age of women retirees reaching 63.8 years in 2015 and men 66.1 years.
Mr Yates said the rise in retirement ages, while partly due to desire to work longer, also had a negative financial driver.
“A lot of people got frightened by the market crash accompanying the financial crisis and decided they need a bigger financial buffer before they retire.”
For 16 years the HILDA survey, run by the University of Melbourne, has polled the same 17,000 Australians.
The report’s author, Professor Roger Wilkins, pointed to the falling home ownership levels among younger people. In 2014, approximately 25 per cent of men and women aged 18 to 39 were home owners, down from nearly 36 per cent in 2002.
Younger people with housing debt saw average mortgages up from $169,000 to $336,500 between 2002 and 2014.
That reality plus rising prices meaning people have to save longer before buying “could result in the superannuation system being thwarted in its aim to provide retirement income by rises in outstanding mortgage debt”, Professor Wilkins told The New Daily.
Young people may have been hit hard by Melbourne and Sydney’s steep property prices, but experts warn that soaring home values are creating victims at all levels of the market, including people who already own homes.
This week’s Household, Income and Labour Dynamics in Australia (HILDA) report showed that home ownership among 18 to 39-year-olds has fallen from 36 per cent in 2002 to a new low of 25 per cent.
On top of that, between 2002 to 2014, the average mortgage debt of young homeowners increased by 99 per cent in real terms, from $169,000 to $337,000.
But there are other victims overlooked in a national housing debate that focusses on the young.
An inflated property market has wide-ranging repercussions for many demographics, according to Greville Pabst, executive chair of WBP Property Group and a judge on The Block TV show.
“Socially, you’re going to see a very big divide between the haves and the have nots,” Mr Pabst said.
Here are a few examples of the potentially overlooked casualties of Australia’s real estate boom.
It’s no surprise that many renters don’t fare well in expensive property markets, as the demand for rentals pushes up prices.
The latest Department of Health and Human Services’ rental affordability data revealed that a mere 5.7 per cent of new lettings were deemed affordable over the March quarter — the lowest since the report was first compiled in March 2000.
“Renters face the dilemma of paying off someone else’s mortgage and not building up equity in a property which can be a good form of security and wealth,” Bessie Hassan, property expert at Finder.com.au, said.
“There’s greater flexibility with being able to move around but they also don’t have the freedom to renovate or upgrade the property to suit their personal tastes.”
Unfortunately for singles, the dream of home ownership is even tougher because they need to service a mortgage on one income.
“This can greatly affect the areas or regions where you can afford to live and your ability to manage the ongoing costs such as repairs and maintenance,” Ms Hassan said.
“Singles may need to reside within fringe suburbs as they’re priced out of inner-city suburbs.”
In particular, pregnant single women may have to leave the workforce or pull back to part-time or casual work, which can impact their ability to afford a home, Ms Hassan said.
“Single borrowers may also be seen as higher-risk borrowers [by banks] due to a lack of dual income.”
While owner-occupiers have fewer problems than renters or singles, an inflated property market often leaves families or couples beached in the one spot for many years.
Upgrading to a bigger home becomes too expensive once agent fees, marketing costs and stamp duty are taken into account.
“If you’re selling a property for $1 million, then you are looking at paying at least $80,000 in stamp duty and associated costs,” property lecturer Peter Koulizos said.
“That’s money that could be spent on renovation instead. So people are staying put more; there’s less mobility.”
Greville Pabst at WBP Property Group added that many Generation Xers had secured mortgages at very low interest rates, but were also highly leveraged.
“Interest rates will go up and some of these people may be in trouble.”
While many pensioners own their own homes, they’re often saddled with expensive land tax bills.
“As the value of their property goes up so does their tax bill, which they struggle to pay because they’re asset rich, but cash poor,” Mr Pabst said.
Furthermore, according to the HILDA report, young adults are living with their parents longer: 60 per cent of men aged 22 to 25 and 48 per cent of women the same age were living with their parents in 2015, compared with 43 per cent and 27 per cent respectively in 2001.
Parents may own their own home, but it could be full of their adult children. Or they may find themselves digging into their retirement savings to help their kids onto the ladder.
“Those that can afford it are now helping their children buy a home,” Mr Pabst said.
“That is the great divide that is only going to increase.”
This year’s Household, Income and Labour Dynamics in Australia (HILDA) survey results confirm, with damning certainty, how Australia is spiralling back into inequality based around property ownership.
The Household, Income and Labour Dynamics in Australia survey, one of the most comprehensive studies of social and economic trends, shows the proportion of 18 to 39-year-olds owning their own home slumping from 36 per cent in 2002 to just 25 per cent today.
Within that figure, couples with dependent children went from an ownership rate of 55.5 per cent 15 years ago, to just 38.6 per cent.
That’s important, because it is parents passing wealth down to their children that are once again starting to define who gets into property and who doesn’t – we’re going back to a 1950s-style class division.
All in the numbers
To see how, consider the way assets grow in value over time, and the relationship between inflation-adjusted (‘real’) growth, and nominal growth.
Imagine a couple buying a home in Brisbane in 2002 at the age of 25. When they hit 40 this year, two things will have happened.
Firstly, for any given interest rate, the real value of their monthly mortgage payments will be lower thanks to the eroding effect of inflation.
Assuming their income had only just kept pace with inflation, their repayments after 15 years would be, for any given interest rate, only 70 per cent as large a chunk of their pay packets.
Secondly, the home would be worth about 1.9 times as much in inflation-adjusted terms, or 2.7 times as much in nominal dollars, based on ABS data.
Those left behind
By contrast, a 25-year-old couple who decided not to buy in 2002, but who at the age of 40 decided to do so today, faces two financial nasties – they’ll need a much larger deposit; and they’ll have to hand over a much larger chunk of their income each month if they want to pay off the home by retirement.
If this example were set in the 1980s and 1990s, you might say “it’s their own stupid fault”.
And you’d probably be right – the barriers to entering the housing market were much lower then.
Today, however, the HILDA numbers describe a housing market in which many young Australians have no choice about getting into the market.
Since the turn of the millennium, house prices across Australia have roughly doubled in inflation-adjusted terms, and a deposit for a home can’t just be ‘scraped together’ by maxing-out a few credit cards and smashing the piggy bank.
So young Australians have three options: stay at home for years more and save madly for a deposit; move out and rent, saving even more madly for a deposit; or receive a windfall gift or loan from the ‘bank of Mum and Dad’.
The HILDA data shows more young Aussies opting for the first option. In 2001, 43 per cent of men and 27 per cent of women aged 22 to 25 lived with their parents, but those numbers have now ballooned to 60 per cent for men and 48 per cent for women.
The old progression of moving out and renting, scraping together a deposit, and then moving into property ownership is almost impossible for many – unless the ‘bank of Mum and Dad’ is able to help.
A compounding problem
When Mum and Dad are unable to help with a deposit, the effects on wealth equality begin to compound.
Today’s 25-year-olds who do not have family money behind them will take much longer to get into the market, meaning they’ll have smaller capital gains behind them when their own children come asking for help.
Buying a home has never been a universal right, but as detailed last week, it’s something that at its peak was available to 71.4 per cent of Australian households.
As that number slides lower – or tumbles lower for younger groups – it’s time to face facts.
The new class divide in Australia is between those who have generous property-owning parents, and those who do not.
Income inequality is worsening in Australia, according to comprehensive new research that finds renters, pensioners and students are feeling the pinch while high earners get pay rises.
ME bank’s twice-yearly survey of 1500 households, conducted in June and published on Monday, revealed bigger gaps in income, housing and financial worries across the nation.
In the last financial year, the overwhelming majority of Australian households (68 per cent) saw their incomes stagnate or fall. Only 32 per cent got pay rises – the lowest in three years.
Income inequality was apparent.
Almost half (45 per cent) of households earning less than $40,000 said their incomes went backwards, while almost half (46 per cent) of households on at least $100,000 saw pay rises. These high earners were least likely (17 per cent) to report income cuts.
Meanwhile, the incomes of 46 per cent of the middle class (households earning $75,000 to $100,000 a year) were stagnant in 2016-17, according to the survey.
If the results reflect the nation’s finances, then just over half of all Australians (51 per cent) are living pay cheque to pay cheque, spending all their income or more each month, with nothing leftover.
ME’s consulting economist Jeff Oughton, who co-authored the report, said the findings were relevant to the current debate over inequality because “this is how people feel”.
“The bill shock, the income cuts and the housing stress were quite loud signals,” he told The New Daily.
“There have been different winners and losers here, post the global financial crisis, and different winners and losers from low interest rates.”
The good news was that, overall, those who filled out the 17-page survey were feeling slightly less worried about their finances, perhaps because the global economy appears to be recovering.
ME’s financial comfort index − measured by combining reflections on debt, income, retirement, savings and long-term investments − is now at 5.51 out of 10, up from 5.39 in 2012.
However, vulnerable groups were doing it tough.
Renters were far less financially comfortable (4.52 out of 10) than those paying off a mortgage (5.47) and outright home owners (6.44).
Students were the most worried. Their financial confidence plummeted from just over five to 4.32 over the last year, the lowest since the survey began in 2011. This may have been a response to the government’s increase to university debt repayments.
Single parents improved but still ranked poorly (4.95 out of 10).
Self-funded retirees were the most comfortable (7.12 out of 10) while age pensioners were among the least (5.03).
Households earning over $200,000 recorded a staggering double-digit rise in financial comfort – up 10 per cent to 7.85 out of 10 – while those on $40,000 or less were stuck at 4.43.
Overall, Australians were more confident about their debt levels (6.31 out of 10), income (5.72), retirement (5.18), savings (5.07) and long-term investments (4.99).
The only key measure of financial comfort that worsened was when households were asked to imagine their finances in 2017-18: confidence on that measure fell three per cent to 5.31 out of 10, reflecting a general pessimism in the economy.
According to the report, a key reason many Australians fear the future is that, despite low inflation, the price of fuel, power, groceries and other necessities appear high and rising.
A growing number also expect their ability to manage debt to deteriorate if mortgage interest rates rise significantly.
One in five households said they spent more than half their disposable income on housing payments – with the majority renters.
A third (31 per cent) expected to be worse off financially if the Reserve Bank raised the official cash rate by 100 basis points, from 1.5 to 2.5 per cent, including half (47 per cent) of those with a mortgage.
However, 29 per cent said they would be better off – a reflection of those who own their homes and investors seeking better returns.
Generation X, those born between 1961 and 1981 (41 per cent), and single parents (36 per cent) were those most concerned about rising rates. And owner-occupiers (53 per cent ‘worse off’, 22 per cent ‘better off’) were far more concerned than property investors (35 per cent ‘worse off’, 29 per cent ‘better off’).
Households who expected to benefit from rising rates included outright home owners (38 per cent), those earning $100,000+ (36 per cent) and retirees (32 per cent).
Pleasingly, only three per cent of households said they were behind on their mortgage payments. But this was much higher among single parents (15 per cent) and Australians earning under $40,000 a year (9 per cent).
There was also a spike in those who expected to fail to meet minimum debt repayments in the next 6 to 12 months, up from 5 per cent to 9 per cent.
Further reflecting the divide, all groups of workers – full-timers, self-employed, part-timers and casuals – reported more financial confidence.
But the comfort levels of the unemployed plummeted from 4.5 to 3.12 out of 10, the lowest ever.
The divide was also seen across geographical regions. Metro areas rated their financial comfort 5.66 out of 10, while regional areas were 5.05.
The only state to worsen was South Australia, where financial comfort fell from 5.70 to 5.20 out of 10 over the last year.
The revelation that Australian consumers are using card payments more often than cash is a worry because of a lack of fee transparency, an expert has warned.
The Reserve Bank of Australia reported this week that 52 per cent of all transactions are card payments, with only 37 per cent by cash.
Three years ago, cash was 47 per cent and card only 43 per cent.
Cash payments were most common for fast food, cafes, restaurants, bars and pubs, and least common for holidays and household bills. And the biggest users were Australians aged 50 to 65, and those in the bottom half of the income bracket.
Professor Rodney Maddock, a researcher at the Australian Centre for Financial Studies, said the transition to cards is premature because the current system is “wasteful” and “a mess” compared to cash.
“Most people have got no idea of the true cost they’re incurring when they use a credit card or a debit card or Eftpos or BPay. The current system makes it really, really hard for anybody to understand that,” he told The New Daily.
“Some of the fees are paid by the user, some by the merchant and some by the banks. It’s completely opaque.”
How the system works is that banks charge merchants ‘interchange fees’ for every credit or debit card payment they accept. The merchants claw back this money with surcharges (‘If you buy less than $15, we charge you $2’) and with higher prices across their stores.
The banks keep a percentage of these fees, pay a slice to the credit card company whose logo is on the card (probably Visa or Mastercard), and give the remainder as perks to rewards card holders.
Then customers must factor in annual fees and rates of interest charged by their banks.
In a recent paper, Professor Maddock and a colleague called for card holders to be treated the same as ATM users. A message should flash up on the screen asking the card holder if they were willing to pay the fee, they wrote.
“We want all of those costs to be transparent to the customer, because they are paying too many different ways. It’s too hard to tell as a customer what in the hell you are doing.”
Another academic, Professor Steve Worthington at Swinburne Business School, a researcher on the global payments sector, agreed that card fees are “incredibly opaque, incredibly not well understood”.
His particular concern was that consumers might not realise credit card rewards programs have recently been “devalued”.
“It is a very open question if they are worth it in any way, shape or form,” Professor Worthington told The New Daily.
Mozo, a financial product comparison website, has estimated that the average credit card spend required to earn $100 is now $22,426 a year, up from $18,765 in 2015 – and that the average customer would need to spend $60,000 a year on their card to make it worthwhile.
Rewards programs are being devalued because of new Reserve Bank regulations designed to improve transparency by putting caps on interchange fees.
Professor Maddock said the changes have not simplified card payments enough.
“The Reserve Bank has got itself into an awful mess having to regulate lots of different points in the system. It would be a lot simpler if they just regulated at one point.”
Mike Ebstein, a payments consultant and former second-in-charge of credit cards at ANZ, disagreed that card payments are inferior to cash. He said the advent of cards was a “quantum leap in convenience and security”.
“It’s baloney. There is a huge cost to the economy from the cash transactions that remain,” he told The New Daily.
“Merchants that accept cash don’t get value until they bank, there’s shrinkage, there’s pilferage, there’s security.
“Most advanced economies around the world are promoting the transition away from cash towards card payments, which are much more trackable.”
The Australian government has commissioned a taskforce headed by former KPMG chair Michael Andrew to investigate the ‘black economy’. It is widely expected to recommend further curbs on cash payments.
Shadow Treasurer Chris Bowen gave a good speech on Tuesday, promising to super-size Labor’s planned banking royal commission.
Originally intended to flush out illegal and deceptive activity in the banks, a royal commission should, he says, spring clean their legal activities too because that’s where the real damage to the economy is occurring.
Actually, Labor doesn’t need a royal commission to address the problem Mr Bowen described – namely, the hodge-podge of regulations being used to deal with the housing-credit bubble. A bit of well-written legislation would do the job just fine.
He is right, however, that we have a problem.
The key regulators who influence bank behaviour – the Reserve Bank, the Australian Prudential Regulatory Authority and the Australian Securities and Investment Commission – are discharging their duties admirably, but are still somehow allowing the banks to gobble up more and more of Australian life.
Australia’s growing private debt to GDP ratio, he points out, is second only to Switzerland’s, at 123 per cent.
Mr Bowen spoke about the need for banks to be “unquestionably strong”, complained about the “composition of the property market, investors versus owner-occupiers”, and repeated regulators’ concerns that household debt is making the economy less resilient.
Well that’s all true. But if he wants to sharpen his rhetoric, he’d should reframe those comments from the perspective of young Australians.
In the space of just 70 years Australians climbed a home ownership mountain, only to find themselves sliding down the other side.
After World War II, only half of private sector homes were owned, either with or without a mortgage, by their occupants.
That climbed rapidly to peak at 71.4 per cent in 1966 – a level that fluctuated a bit, but was essentially maintained until the turn of the millennium.
But as the housing-credit bubble inflated, and prices sky-rocketed, the home ownership rate started sliding – from 69.5 per cent in 2002, to 67 per cent at the 2011 census, and to 65.5 per cent last year.
This is a direct result of the debt bubble that Mr Bowen acknowledged in his speech, and which he rightly points out has been inflated by the property-investor tax breaks of negative gearing and the capital gains tax discount.
But wait, it gets worse. It is the younger generations – new entrants to the housing market – where all the damage is being done.
Twenty- and thirty-somethings are either being locked out of the market forever or taking on budget-crushing mortgage repayments.
Some among those age groups may eventually receive large inheritances from their property-owning parents – assuming, that is, that today’s sky-high valuations do not tumble in the years ahead.
But for those that do not, one of two dismal economic futures awaits.
Firstly, the members of ‘Generation Rent’, on present settings, will face an under-funded retirement.
That’s because Australia’s superannuation system, and the complementary state pension, were calibrated in the early 1990s for a nation in which most people did not have to pay rent in retirement.
Secondly, the young Australians ‘lucky’ enough to secure huge mortgages will wave goodbye to a proportionally larger chunk of their household budget each month over the next 25 or 30 years, if they wish to actually pay off their homes.
Low interest rates, remember, only reduce the interest bill. The principal repayments not only stay the same in nominal terms, but in a low interest-rate environment they are ‘eroded’ more slowly by inflation.
Get to the root of the problem
So the problem, as Mr Bowen defines it, is the overlap and confusion of “ad hoc” attempts by regulators to head off disaster – particularly APRA’s attempts to slow mortgage lending.
But surely it’s better to remove the cause of those policy contortions than to unscramble the omelette.
As it happens, Labor last year pledged to reduce the wealth-redistributing and bubble-inflating tax incentives of negative gearing and the capital gains tax discount.
That policy should go further, but at least it’s a good start.
So, yes, let’s have a royal commission into the illegal practices of the banks.
But as for ending the perfectly legal attack on the finances of young Australians, Labor only has to deliver what it’s already promised.
Much is being made of a cooling in key property markets, but a senior analyst warns that even a halving of price growth probably won’t help first home buyers.
Louis Christopher, head of SQM Research, said his company’s prediction of 6 to 10 per cent national price growth in 2017 was still looking “intact”, and that even much slower 3 per cent growth in 2018 would be unhelpful.
“Overall, I think affordability will still deteriorate a little in the second half of the year, and that will particularly be the case for Melbourne, where I don’t see a lot of evidence right now of a major slowdown occurring,” he told The New Daily.
“We haven’t made a forecast yet for 2018, but if we were to see smaller price rises but still, say, in excess of 2 to 3 per cent, you would still see affordability deteriorate, assuming interest rates stay where they are.”
Property prices were a huge topic of discussion this week, after Deloitte Access Economics said in its annual business outlook that “gravity may soon start to catch up with stupidity in housing markets”.
UBS also predicted that national price growth would slow to between zero and 3 per cent in 2018.
Treasurer Scott Morrison has even declared victory, saying recently that the Coalition government had achieved a “soft landing” for prices.
In May and June, plenty of data suggested that price growth slowed, auction clearance rates fell and the writing of new home loans, especially to investors, moderated.
But what really matters to first home buyers is price growth, and there is little evidence that affordability has stopped deteriorating, even if prices aren’t growing as ‘stupidly’ anymore.
As seen in the chart above, price growth according to CoreLogic’s measure is only barely moderating, if at all.
And according to SQM Research, Melbourne prices are growing strongly, even if Sydney is showing some weakness.
The blue lines are the asking prices for houses, the purple for three-bedroom houses, red for units and orange for two-bedroom units.
Domain also reported that the national median house price went up 1.7 per cent in the June quarter, and that this pushed the median price to a new record high of $818,416, which was 10 per cent higher than at the same time last year.
Mr Christopher attributed the recent slowdown to APRA’s regulatory intervention, and a blow to investor confidence from the federal budget’s surprise crackdown on negative gearing, via a restriction on tax deductions for plant and equipment depreciation.
“It basically turned thousands of properties from being cashflow positive after tax to being cashflow negative, and that was a direct hit upon negative gearing and fitted in with this view of the Libs being Labor-lite.”
However, prices in the two biggest markets of Sydney and Melbourne appear to be rebounding, and annual price growth rates are holding steady. According to Corelogic, annual price growth for the five capital cities was still sitting around 9 per cent, and monthly price growth for July was tracking around 2 per cent for Sydney and Melbourne.
Even the auction clearance rate is improving slightly. Nationally, the capital city clearance rate was 69.4 in the week ending July 16, up from 68.4 the week before.
Mr Christopher also noted that stamp duty concessions for first home buyers in Victoria and New South Wales were likely to offset any slowdown.
“Basically, it means a saving for a first home buyer of upwards of $25,000 in each state. That’s pretty big money and that type of saving in the past, through former first home owners grants, have moved the market.”
There is of course a sure-fire way to kill price growth: substantial rate hikes by the Reserve Bank. Mr Christopher said national prices could go backwards if we saw six rate increases in a row.
“If we were to see a 150 basis point rise over two years, that would be enough to create a correction in the national market.”
He also noted that even if national price growth continues, there are bargains to be found in Adelaide, Hobart and Perth.
“I can’t stress enough that it’s very much a mixed market and the national number masks a lot of what is happening on a city-by-city basis.
“It’s focussed on Melbourne and Sydney and look, yes, the majority of the population is in those two large capital cities. But affordability is better elsewhere.”